The past year of generally good economic news in the U.S. was led by strong gross domestic product (GDP) growth. One of the central contributors to this cycle has been growth in spending by state and local governments.
While much focus has been on the fiscal status of the federal government, states and localities have generally improved their fiscal positions throughout the post-pandemic cycle. We rely on these levels of government to provide critical public services like safety, road maintenance and education. And unlike the federal government, these entities cannot support their obligations by issuing currency; sustainable finances are important.
State governments take in the majority of their revenues through taxes on sales and income, as well as direct charges for services like vehicle registration and university tuition. States also receive federal funding to administer programs like Medicaid and public schooling. Local governments, meanwhile, receive much of their funding from property taxes.
Across all these funding sources, the booming post-pandemic economy has been supportive of higher government revenues. Elevated consumer and business spending supported sales taxes and fees; booming employment and wage gains accreted to income tax receipts; and higher property values led to larger property tax assessments.